Looking hard for reasons to give thanks

Alan Wheatley, Global Economics Correspondent

6 Min Read

LONDON (Reuters) - With every year that passes, fewer and fewer people lead a life that is poor, nasty, brutish and short. So it is only right to step back, as America does this Thursday, to appreciate the bounties bestowed by economic progress.

Yet this Thanksgiving, with the impact of the 2008 global financial crisis refusing to fade, will not feel like a time to celebrate.

In Europe, another week brings another meeting of finance ministers to try to ‘save’ Greece as well as another set of surveys likely to show the euro zone heading for another quarter of recession.

And in the United States, despite warm words after talks on Friday, worries about the capacity of politicians to put the public finances on a sustainable footing are sure to persist.

Ward McCarthy, chief financial economist at Jefferies in New York, said he was sceptical of the consensus that Democrats and Republicans would strike a budget bargain by the year-end deadline for the two sides had painted themselves into corners.

He said it was important to distinguish between the compromises needed to dodge the immediate ‘fiscal cliff’ - a mix of tax increases and spending cuts set to take effect in January - and a long-term deal to slash the deficit.

“It’s virtually impossible to get a long-term budget deal done before the end of the year. The fiscal cliff doesn’t end the process; it’s just the beginning. So we still have the threat of another credit downgrade hanging over our head,” McCarthy said.

Joe Carson, an economist at AllianceBernstein in New York, shares those concerns; a short-term fix would not provide the clarity that businesses and consumers need.

“And without a legislative solution to the federal deficit and ever-rising federal debt problem, the U.S. runs the risk of another credit rating downgrade, with the added costs and uncertainty that could also weigh on economic growth prospects for years to come,” Carson said in a note.

EUROPE’S TROUBLES

Leaders of the 27-member European Union will hold a two-day meeting in Brussels this week to try to thrash out a long-term budget of their own. Tempers can be expected to fray.

Of greater immediate importance, however, will be talks on Tuesday among euro zone finance ministers to try to agree with the International Monetary Fund on a stop-gap financing program for Greece.

Athens is drowning in debt and needs a new write-off, the IMF and virtually all private economists say. But that is politically taboo before German elections next September. Hence the need to keep drip-feeding aid to Athens - something the Fund is reluctant to do on the basis of debt sustainability projections it considers unrealistic.

The European Central Bank has reduced the risk of a disorderly break-up of the euro by promising in principle to buy the bonds of big indebted countries such as Spain and Italy.

But the wrangling over Greece is a constant reminder of the single currency’s shaky foundations, and that weighs heavily on Europe’s economy.

“The financial stability that has been created by the measures that the ECB has taken over the summer is not translating into a better economic outlook,” said Bert Colijn, an economist in Brussels with the Conference Board, a research outfit.

GIVING SOME THANKS

The euro zone went into the fourth quarter with industrial output slumping, and a November survey of the area’s purchasing managers due on Thursday is likely to offer scant relief.

Economists polled by Reuters expect the index derived from the survey to tick up to just 45.8 from 45.7 in October - still well below the boom-bust threshold of 50.

A parallel poll of procurement executives from German industry is forecast to show no change, while on Friday Munich’s IFO institute is expected to report a deterioration in the business climate in Europe’s biggest economy.

Colijn said concern over the prospects for China, a big customer, was affecting Germany. “You see in declining orders and business confidence that the global weakening in manufacturing is a concern to Germany as well,” he said.

But there should also be reasons this week to give some sort of thanks. Several banks expect China’s HSBC/Markit purchasing managers’ index (PMI) to regain the neutral mark of 50 after a reading of 49.5 in October.

And even the dark cyclical cloud enveloping the euro zone’s PMIs has a silver structural lining, according to a Goldman Sachs study. Although pointing to a second straight quarter of recession, the recent surveys are consistent with the economic rebalancing that the single currency area needs, the bank said.

Germany is gradually stimulating domestic services, while Spain’s export sector is faring better at the expense of construction and public services.

In sum, Goldman suggests, “Spain is an economy where the all too obvious pain of the current recession may be obscuring an ongoing, necessary and broadly effective restructuring.”

As for the United States, October data on housing starts and building permits due on Tuesday might show some payback after a strong September.

But McCarthy with Jefferies said he was confident that housing was in the early stages of a long-term rebound.

“What I like about it is that it’s balanced and a gradual process, not a boom, which means it’ll probably have longer legs. Housing typically leads recoveries. This time it has lagged, which means as a consequence that the recovery itself could have longer legs,” he said.